Stock of the Week: June 2015

Sunday, June 28, 2015

All Aboard the Depot

6/28/15

Although mortgage rates are sitting at the highs for the year and although the Fed is expected to raise rates later this year, if not certainly early next year, the housing sector seems to be defying the odds. KB Homes and Lennar both reported blowout quarters in the last couple weeks, with Lennar saying orders rose 18% with values up 28%, which contributed to EPS gains of 30%. Additionally, on June 23, the Commerce Department said new home sales in May rose 2.2% to a 7-year high, and optimism continues to grow into the summer months. But I believe there is a better pure housing recovery play other than the homebuilders…Home Depot (HD).

Home Depot has, and continues to be one of the best-run companies out there, and quarter after quarter, they continue to impress. The reason that now is the best time to buy the stock is because, while most retailers have their best quarters in Q4, Home Depot celebrates it’s Christmas in Q2. Every time you pass a Home Depot during the spring and early summer months, hundreds of people are seen filling their gardening areas, where sales are plentiful and margins are high. With new home sales on the rise, new and existing homeowners will be looking to spruce up their exteriors. But what will really drive Home Depot’s future growth is the dedication it has to becoming an online retail behemoth.

Over the last few years, the company has begun to combat Amazon and improve its e-commerce business, which it is clearly exceeding at. In fact, in comparison-shopping that I have recently done, Home Depot has actually been cheaper than Amazon for a number of different items. But, the true strength of the company’s online business lies in Home Depot’s omnichannel efficiencies, offering in-store pick up and returns, which then drive customers into their stores to add-on to their purchases. At a June 18 Goldman Sachs conference, management provided an update on its e-commerce business, saying that it continues to benefit greatly, with 40% of its brick-and-mortar stores acting as fulfillment centers. Although they didn’t disclose figures at the conference, Home Depot said that the average ticket size online was significantly higher than in-store purchases which range between $55-$65 per transaction. Most of the online purchases would tend to be larger, more costly items like appliances and materials, which customers would rather have delivered to their homes. In addition to offering multiple types of delivery, including 2-day shipping, Home Depot is able to offer more than 1 million different SKUs on line, compared to roughly 250,000 in stores, giving consumers significantly more choices, which could allow Home Depot to open smaller stores in the future, saving a lot of money which will trickle down to the bottom line. As a result, Home Depot is expecting about $4B in e-commerce sales in 2015, making up only 4.5% of overall revenues, which means there is tremendous upside potential.

This $146B company supports a 2.10% dividend that continues to grow, and while trading at a forward P/E of just 18x ’15 earnings, the stock isn’t very expensive. Additionally, HD has a price-to-earnings growth (PEG) rate of 1.68, which means that Home Depot really isn’t very expensive. On a technical level, the stock is trading very well and is above key support. On Friday, Home Depot closed at $112.60, almost 5% off its all-time high reached in late March. If you look at this stock over the last year, there is an uptrend support line that comes into play at $112, which is right around the 100-day moving average at $11.72 and slightly above the 78.6% Fibonacci retracement at $111.23. The stock has traded around that $111-$112 level a number of times in the last couple weeks, but continues to hold. However, having said all of that, without many catalysts coming until its earnings report in early August, you don’t need to rush out and buy the stock on Monday. With unemployment data coming out this Friday and with Greece hopefully exiting the Eurozone once-and-for all, there is still plenty of downside for the broader market, which could give you a better entry point into the stock. If the later scenario plays out, the entire market will be in for a 3% downside move and nothing will be spared. So I would wait until the Greece situation is resolved and look for Home Depot to fall to the 61.8% retracement of $105.92 and buy half of your position there, and then the other half on the way back up using $112 as support. My price target on Home Depot is $142, giving you a roughly 21% upside from Friday’s close.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), ConocoPhillips (COP), Time Warner (TWX), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Dr. Pepper Snapple (DPS), Costco (COST), AMGEN (AMGN), Home Depot (HD), Allergan (AGN), and FireEye (FEYE).

Jeff Lewison

Sunday, June 14, 2015

Forget Greece

6/14/15

Once again, the nonsense that is the Greek bailout, continues to hold US equities hostage on a daily basis. On Wednesday, stocks rallied on news that Greece and the EU were beginning to work together to come up with a plan to save the country. Then naturally, as soon as the markets got word that the plan fell through, stocks dropped drastically on Friday, ending about flat for the week. As I write, S&P futures are down another 11 points indicating another weak opening tomorrow. I said years ago when this Greece issue first came about, that the global economy would be much better off in the long run if the EU just lets Greece fail and be done with it already. It seems very odd that investors still care so much about what’s going on in Greece, when their economy is so insignificant compared to the rest of the world. But this insanity of selling stocks because of what’s going on with Greece can be used to your advantage. High quality stocks will continue to fall, allowing you to pick them up at much lower prices.

This week, the Fed will hold its policy meeting on Tuesday and Wednesday, and will release its statement Wednesday at 1:00pm CT. All eyes will be on Janet Yellen, shortly after, to hear if the Fed will indeed begin raising rates in September, as expected. If Yellen says anything to indicate a rate hike won’t come until December or even later, stocks will rally. I don’t expect that to happen, so I am looking for stocks to move lower later in the week.

While airline stocks have been getting hammered for a few weeks now, one market that is faring even worse are US Treasuries. Interest rates on the 10-year note hit its highest level since last October, running all the way up to just under 2.5%, before falling back down to 2.38% on Friday. While many people believe that interest rates have moved up so much because of expectations of a Fed rate hike, I believe that most of the move is actually based on what’s going on in Europe with the German Bund (not bond). Bund yields have rallied from as low as almost 0 in April to as high as 1% just a few days ago. A move that dramatic is going to have a heavy influence on US Treasuries. But just like I think that the Bund yields are going lower, US Treasury yields are also headed lower, which means prices will rise. Outside of the futures market, the best way to invest in treasuries is through the TLT (iShares 20+ Yr. Treasury ETF). Interest rates have overshot to the upside, just like they did to the downside, and even tough the Fed is on track to raise rates later this year or early next year, most of that is already priced into the market.

On Friday, the TLT closed at $117.95, above the 23.6% Fibonacci retracement of $116.96. If you look at a daily & weekly chart of the TLT, the market has put in a confirmed 5^th wave down (Elliot wave theory) indicating a temporary bottom may be in at $115.26. That level has been a key support and resistance for the TLT, and I believe you can use that level as support for a trade. On a weekly chart, $115 acts as the neckline for the inverted head-and-shoulders, with the head bottoming around $101. So the trade sets up like this…you buy the TLT on Monday, and stop yourself out of the trade if it falls to $114. That gives you a risk of 3.3%. Using the same technical indicators, I see the TLT getting back to $125, which is just above the 50% retracement and previous support prior to falling below that level. That gives you a potential profit of 6%. At the same time, while you’re holding the TLT, you will be bringing in a 2.80% dividend.

I have been saying for over a month that you should have a shopping list ready for the next stock sell-off, and given the fact that the Greece situation will likely last most of the summer, you should have plenty of chances to get your target stocks at better prices. But for now, add some TLT to your portfolio and don’t believe the hype that interest rates are going to continue to go higher.

Last thing before I go because I have gotten a lot of questions about whether I like the recent news from Twitter with CEO, Dick Costolo stepping down. On the surface, you couldn’t ask for better news, however the answer is that even Twitter can screw up something that should have been great news. This was such a ridiculously orchestrated changing of the guard, with co-founder, Jack Dorsey, taking over. Twitter would have rallied 20% if it were not for Dorsey coming out WITH Costolo and praising him for doing a great job with the company and saying that the plan is to continue to run the company the same way, which to me, clearly means that he is just as clueless as Costolo was. If he truly cared about the company, he would have said, “Thanks Dick for your hard work, but we have a lot of work to do because we failed our shareholders and our users, and have a plan in place to get this company back on track.” It was that easy, but instead, he took the high road. I don’t know what the future state of Twitter will be in terms of who the next CEO is or whether the company will get acquired, but I am still holding on to my shares because they have a great product with a strong following and I firmly believe that this will be the #1 source of news in the future. But until a REAL CEO takes over, there is probably a little more downside in the stock.

Jeff Lewison